For years Saudi Arabia has tantalised foreign investors. Blessed with billions of dollars in oil revenues, the country is literally awash with cash, but access to this capital and the domestic market has never been simple. The kingdom is notoriously protective of its market and does not make it easy for foreigners to enter. No one from outside the Gulf Co-operation Council (GCC) region can go to Saudi Arabia independently. All visitors must receive an invitation from a Saudi company or be part of a tour group.
However, it appears that reforms and projects are in progress that could make it easier for foreigners to invest in the country, particularly in its companies and real estate.
Speaking at the Naseba MENA Investors Summit held in Riyadh in November, Saad Al Mojel, vice-president of the board of the Riyadh Chamber of Commerce, revealed several stock market recommendations. While there is no timetable on when these recommendations might become law, he believes that at least some of the proposals will eventually be enacted, as he says they are in the country’s best interests.
Currently the Saudi Arabian stock exchange, called the Tadawul, is dominated by domestic investment, with more than 90% of all transactions made by Saudis and a paltry 0.5% made by non-Arabs. It has more than 125 listed companies, and if Mr Al Mojel gets his way, this number will go up dramatically in the next two to three years. As it stands, the only companies that can list on the Tadawul are public joint-stock firms. There are many companies in the country that are considered closed joint-stock companies (CJSCs), and under the regulations, these firms cannot list on the Tadawul.
The chamber proposes that these companies, of which Mr Al Mojel estimates there are 370, should be listed in a parallel secondary stock market under the umbrella of the Tadawul. The CJSCs would be allowed to enrol in this secondary market two financial years after they are established. Mr Al Mojel believes that encouraging more companies to list will prove beneficial to the domestic economy, but will also make it easier for foreigners to invest in Saudi companies.
He says: “I hope these decisions will be accepted. When these companies are converted to publicly listed companies I am sure that their value will increase.”
While foreign investors would welcome these progressive reforms, the Tadawul is far from becoming a truly international market. Foreigners are still restricted by a different set of regulations than for Saudis. For one, foreigners must have a valid residence permit and a Saudi bank account to open a trading portfolio at the Tadawul. There are ways around this, such as investing through funds managed by individuals based in the country, but it is still a difficult market to access.
On the real estate side, Saudi Arabia is confronting a rapidly approaching housing shortage. Government figures estimate that in 2007, the number of occupied housing units was 4.3 million for a population of 28.7 million. In order to meet a growing population, 1.5 million new units will need to be built by 2015.
Rami Alturki, president of industrial conglomerate Alturki Group, has recently moved his company into real estate in an effort to profit from this demand. Initially involved in the oil, gas, utilities and telecommunications sectors, the firm sees some opportunities in the 300 or so real estate projects under way in the country, worth an estimated $250bn.
Many of these developments are connected to a belief among Saudi builders that incoming legislation will make it easier for individuals (both foreigners and Saudis) to purchase property in the kingdom. Until only a few years ago foreigners were not permitted to buy homes in the country and, while this is no longer true, house prices remain exorbitant. However, both buying and renting could become much more affordable if supply was to increase.
At the moment there is no established mortgage market or regulatory framework in the country, with many individuals receiving loans from families or companies. The new laws would create a formal, regulated mortgage system where domestic banks would set up mortgage units, similar to many systems in the region. If individuals suddenly have access to capital, it could result in a serious boom in the residential housing market. As it stands, there is little incentive for builders to construct residential property as there are few people who can afford to buy a house of their own. Currently, most real estate developments are for commercial and industrial sectors, but there should be significant activity if the residential market is opened up.
Unfortunately, it is not clear when these proposals on real estate and the Tadawul might actually happen. The Saudi government is renowned for the glacial pace of its legislative process. The mortgage reforms have been discussed for years, with final drafts of the law left incomplete. Investors are optimistic, but they are not holding their breath. As for those stock market reforms, Mr Al Mojel stresses that these were only recommendations, and that any changes are not on the immediate horizon.
The main problem is a general lack of transparency, cited by several foreign investors at the conference. CJ George, managing director of Geojit, an Indian financial services company that was bought out by BNP Paribas, says that for him this was the biggest obstacle to investing in the country. He believes that it is a cultural factor, not helped by the fact that most of Saudi Arabia’s companies are run by tightly knit families that tend not to release more information than they have to.
But efforts are being made on this front as well. Part of the reasoning behind the creation of a secondary market is to improve corporate governance and transparency. Companies that become listed on the secondary market will have to meet certain regulations, even more so if they eventually wish to list on the Tadawul.
There have also been some recommendations to break the grip of Saudi families. Mr Al Mojel says: “We are looking at ways to prevent people from sitting on the board of directors of too many companies. Currently many people are with several different companies and we believe this can create conflicts of interest.”
While this looks like progress on the company side, there are many question marks over the transparency of the country’s real estate market. With the mortgage system still in its infancy, investing in residential Saudi property is an unknown quantity for many foreigners. There is wide agreement about a huge level of demand for residential property, but far less is known about the actual process of buying for foreigners. At the moment the best method might be joint ventures with Saudi nationals, but this can add several new risk factors to the deal. So for now, the Saudi market remains a puzzle. The money and the opportunities are certainly there, the question is – how can it be accessed?
Population: 28.7 million
Pop. growth rate: 1.84%
Area: 2.1 million sq km
Real GDP growth: 4.4%
GDP per capita: $20,500
Current account: $132.6bn
Largest sector (% of GDP): Industry 61.9%
Labour force: 6.74 million
Unemployment rate: 11.8%